Shopping centers – the right keys to success

By Andreas Pohl, Deutsche Hypothekenbank

When Germany’s very first shopping centers opened in the 1960s, hardly anyone foresaw the way they would develop over the coming decades. Following a relatively modest annual increases to around 100 centers by 1990, their numbers soared in the first decade after reunification to around 300. Today, they cover an area of approximately 16 million m2, spread across in excess of 400 shopping centers, with more (reportedly up to 80) set to emerge by 2015.

At the same time, shopping centers have now developed into an important asset class for professional investors and are also, of course, a key focus of the diverse financing activities of Deutsche Hypo as a real estate bank.

The following are the two main forms of financing sought from the market:

1. Asset financing, i.e. funding for the purchase of existing shopping centers or rescheduling of current funding.

2. Financing of project developments, i.e. traditional interim financing for new centers during the construction phase through to completion.

On top of these, as a combination of the above two types of financing, there is:

3. Finance for the purchase of existing shopping centers and subsequent support for renovation measures as part of a regeneration project.

While the bank can draw on previous experiences when it comes to financing existing centers and can base future developments on these, an assessment is considerably more difficult when supporting a new construction project.

As a bank we have the scope to limit the economic credit risk adequately by restricting the level of financing, incorporating borrowers’ liability or adopting LTV (loan to value) or DSCR (debt service coverage ratio) covenants.

We know that not all existing or even new shopping centers will post a positive performance and hence meet the expectations placed on them. As such, the financing bank, like the investor, is faced with the critical question of which criteria may be crucial for determining the success of a shopping center and so need to be taken into account in an investment or financing decision.

A successful center needs a balanced mix of small and medium-sized shops

First of all, it is necessary to define the product in question. Unlike smaller centers in medium-sized towns, which are to be seen as complementing or competing with the city centre retail trade, regional shopping centers must be of an appropriate size with suitable pull and appeal.

Critical mass is decisive. This is the minimum size that enables appropriate appeal and therefore regional pull to be achieved. At the same time, of course, having the right blend of sectors and tenants in the center, in terms of quality and quantity, is a key success factor alongside attractive anchor tenants that provide for a core number of visitors and accordingly act as a magnet, a successful center needs a balanced mix of small and mediumsized shops that offer high-profile national and international brands.

What is more, it is important not just to make the act of shopping a pleasurable experience but also to create an atmosphere of wellbeing for customers that invites them to stay for longer, with corresponding effects on purchase decisions. Key contributory factors here are the architecture, floor plan, functionality and state of the property. Good, varied catering facilities are the final piece of the jigsaw.

Besides these design factors, which obviously also include infrastructural elements such as the location, transport links and availability of car parking, basic economic facts also have a decisive influence on the long-term success of a center. The quality of the rental agreements, the reasonableness of the rents relative to floor space productivity and the level of any ancillary costs secure long-term economic viability for owners and tenants alike.

The challenge of meeting the ongoing demands of competition calls for a professional operator able to recognise changes early and respond to them correctly and in good time with suitable measures.

Last but not least, the financing structure must of course suit the project in question and the corresponding characteristics. This involves, in particular, having flexible solutions to cope with the constant change processes associated with this type of property.

The above factors are not exhaustive, but they do provide a good overview of the complexity and diversity of this type of financing. It goes without saying that the size of the individual investments will also dictate special requirements in terms of the quality of the parties involved, i.e. investors and operators.

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